It is overwhelming for every citizen to pay their income tax for the first time. But beginners may face some difficulties while paying the income tax. They may not be familiar with specific terms and regulations mentioned at the time of filing. To help you with this issue, we have come up with an overview of income tax basics for beginners.
If you are new to income tax, you will have a lot of confusion. Did you recently graduate and are currently looking for a job? Or are you someone who just took up a job assignment and is planning to file the income tax returns? We have simplified the entire income tax process for you, preparing you to face all the challenges in your first job. Below is a compilation of some general terms of income tax which you need to get familiarised.
Income Tax Basics for Beginners
Previous year
The previous year, also known as the tax year or financial year, is 12 months. Usually, it starts on April 1st and ends on March 31st of the following year. Irrespective of the time you start your job, your tax year will end on March 31st, and a new tax year will begin on April 1st. So it would be best if you planned the taxes for each financial year accordingly.
Assessment year
You might have often come across this word during income tax filing. The assessment year is the financial year after the previous year, where you will assess and file your taxes in the prior year. For example, the assessment year is 2019-2020 for the last year, 2018-2019. Your assessment year is 2020-2021, and your previous year is 2019-2020. If you started your job in January 2020, your tax year would end on March 31st 2020. You must file your income tax returns on or before July 31st 2020. It may get extended to December 31st 2020.
Knowing your salary
You can get details of your salary, including Pay Slip, Tax Statement etc., from the HR department or Payroll. From that, you will get a general idea about your salary details and where and all you can save taxes. For instance, if your company gives HRA or house rent allowance, you can save tax while living on rent.
Incomes on which you need to pay tax
If you are business-minded, you may be earning from other sources besides your salary. So your total income becomes the total of all the revenues you earn. Below is a list of a few income sources.
Salary income
Salary income includes salary, allowances, leave encashment, etc. it is generally the salary you draw for your job, usually mentioned in your employment agreement.
House property income
It is the income you get from the house or building you own. It can be either self-occupied or rented.
Capital gain income
If you sell your capital asset, you may experience loss or gain. It would be best if you mentioned that income when filing income tax returns.
Professional or business income
It would help if you mentioned the gain or loss you endeavoured when carrying out a business or profession.
Income from other sources
This income is the compilation of the revenues from your fixed deposits, savings bank accounts, gifts received and family pension.
Deductions
You can reduce your gross income with the help of deductions. You are liable to receive deductions if your income comes under section 80C of the Income Tax Act. So your taxable income is the amount you get after reducing the deductions from your gross income. You can reduce your tax further if you properly utilise your deductions.
Get familiarised with Section 80C
If you properly use Section 80 C of the Income Tax Act, you can receive a deduction of up to INR 1 50,000 from your gross income. Below are some of the investment schemes with which you can receive deductions.
Public Provident Fund or PPF
If you invest in a public provident fund or PPF, you will receive deductions based on section 80C. The minimum amount you can deposit in a PPF account is INR 500 and can go up to a maximum of INR 1,50,000 in a financial year. The money you deposit in PPF with each passing year gets accumulated, enabling you to claim more deductions. PPF is the most reliable source to save your hard-earned money. You can easily open your PPF account in a bank.
Fixed deposits
For investors, fixed deposits or FD offer capital protection and sizeable interest income. You need to invest in FDs for at least five years to get the tax benefits mentioned under Section 80C. It is yat another safe source to deposit your money. But the interest you derive from the deposits is taxable.
Mutual Funds or ELSS
ELSS or Equity Linked Savings Scheme is the only mutual fund scheme allowed under Section 80C. It is becoming trendy because of its massive performance in the past years. The lock-in period in ELSS is three years which is the lowest till now.
Tax deducted at source or TDS
By TDS or tax deducted at source, we mean a tax deduction by the taxpayer. Payers can deduct a certain amount of tax according to the rules and regulations of the income tax department. For example, if the taxable income of an employee is more than INR 2,50,000, he is liable for tax deductions. But to get that deduction, you must come under the tax slabs mentioned in each financial year. Moreover, the bank will deduct TDS if you derive interest from your FDs. To get deductions, you must mention your PAN number. Otherwise, the bank will give you a standard deduction of 10%. If you mention your PAN number, you are likely to get a deduction of 20%.
Calculating Payable Tax
Your final payable tax is calculated by applying rates and tax slabs on your taxable income. You can reduce the TDS from the tax payable.
Standard deductions
According to Budget 2018, employees can receive a standard deduction of up to INR 40,000 from their gross salary. This standard deduction will cover your medical reimbursement up to INR 15,000 and transport allowance up to 19,200 within a financial year. The taxpayer is liable to receive an additional income exemption of INR 5,800. The standard deduction limit has been increased to INR 50,000 from 2019-2020 onwards.
Knowing the rules and regulations of the income tax department will come in handy when filing income tax returns. A certification course in income tax is yet another way to file your returns without any tension. Finprov Learning is offering a certification course on income tax which covers all its essential elements and is highly beginner-friendly. When it comes to various accounting certification courses, Finprov is the best choice. Be part of Finprov and file your income tax returns easily.
